UPM annual report 2014

Notes to the consolidated financial statements (In the notes all amounts are shown in millions of euros unless otherwise stated.)

derivatives that are designated and qualify as fair value hedges and that are highly effective both prospectively and retrospectively are recorded in the income statement under financial items, along with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The carrying amounts of hedged items and the fair values of hedging instruments are included in interest-bearing assets or liabili- ties. Derivatives that are designated and qualify as fair value hedges mature at the same time as hedged items. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amor- tised to profit or loss over the period to maturity. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. Amounts deferred in equity are transferred to the income statement and classified as income or expense in the same period as that in which the hedged item affects the income statement (for example, when the forecast external sale to the Group that is hedged takes place). The period when the hedging reserve is released to sales after each derivative has matured is approximately one month. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the income statement within finance costs. When the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, fixed assets) the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognised in depreciation of fixed assets. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the committed or forecast transaction is ultimately recognised in the income statement. However, if a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. The fair value changes of forward exchange contracts that reflect the change in spot exchange rates are rec- ognised in other comprehensive income. Any gain or loss relating to the interest portion of forward exchange contracts is recognised immediately in the income statement under financial items. Gains and losses accumu- lated in equity are included in the income statement when the foreign operation is partially disposed of or sold. At the inception of the transaction, the Group documents the rela- tionship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as hedges to specific assets and liabilities or to specific firm commitments or forecast transactions. The Group also documents its assessment, both at the hedge inception and on an on-going basis, as to whether the deriva- tives that are used in hedging transactions are highly effective in offset- ting changes in fair values or cash flows of hedged items. Certain derivative transactions, while providing effective hedges under the Group Treasury Policy, do not qualify for hedge accounting. Such derivatives are classified held for trading, and changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement as other operating income or under financial items. Segment reporting Operating segments are reported in a manner consistent with the inter- nal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the President and CEO. The accounting policies used in segment reporting are the same as those used in the consolidated accounts, except for that the joint opera- tion Madison Paper Industries (MPI) is presented as subsidiary in UPM Paper ENA segment reporting. The costs and revenues as well as assets and liabilities are allocated to segments on a consistent basis. All inter- segment sales are based on market prices, and they are eliminated on consolidation.

transferred. Associated company and joint venture accounting policies have been changed where necessary to ensure consistency with the poli- cies adopted by the Group. Equity accounting is discontinued when the carrying amount of the investment in an associated company or interest in a joint venture reaches zero, unless the Group has incurred or guaran- teed obligations in respect of the associated company or joint venture. Non-controlling interests The profit or loss attributable to owners of the parent company and non- controlling interests is presented on the face of the income statement. Non-controlling interests are presented in the consolidated balance sheet within equity, separately from equity attributable to owners of the parent company. Transactions with non-controlling interests are treated as transac- tions with equity owners of the Group. For purchases from non-control- ling interests, the difference between any consideration paid and the rele- vant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses of disposals to non-controlling interests are also recorded in equity. Foreign currency transactions Items included in the financial statements of each Group subsidiary are measured using the currency of the primary economic environment in which the subsidiary operates (“the functional currency”). The consoli- dated financial statements are presented in euros, which is the functional and presentation currency of the parent company. Foreign currency transactions are translated into the functional cur- rency using the exchange rate prevailing at the date of transaction. For- eign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when recognised in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges. Foreign exchange differences relating to ordinary business opera- tions of the Group are included in the appropriate line items above oper- ating profit and those relating to financial items are included in a sepa- rate line item in the income statement and as a net amount in total finance costs. Income and expenses for each income statement of subsidiaries that have a functional currency different from the Group’s presentation cur- rency are translated into euros at quarterly average exchange rates. Assets and liabilities of subsidiaries for each balance sheet presented are translated at the closing rate at the date of that balance sheet. All result- ing translation differences are recognised as a separate component in other comprehensive income. On consolidation, exchange differences arising from the translation of net investment in foreign operations and other currency instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign entity is par- tially disposed of, sold or liquidated, translation differences accrued in equity are recognised in the income statement as part of the gain or loss on sale. Derivative financial instruments and hedging activities Derivatives are initially recognised on the balance sheet at fair value and thereafter remeasured at their fair value. The method of recognising the resulting gain or loss is dependent on whether the derivative is designat- ed as a hedging instrument, and on the nature of the item being hedged. On the date a derivative contract is entered into, the Group designates certain derivatives as either hedges of the fair value of a recognised assets or liabilities or a firm commitment (fair value hedge), hedges of a highly probable forecasted transaction or cash flow variability in func- tional currency (cash flow hedge), or hedges of net investment in a for- eign operation (net investment hedge). The fair value of derivative finan- cial instrument is classified as a non-current asset or liability when the remaining maturity is more than 12 months and as a current asset or liability when the remaining maturity is less than 12 months. The Group applies fair value hedge accounting for hedging fixed interest risk on interest-bearing liabilities. Changes in the fair value of

1 Accounting policies

and the equity instruments issued at the acquisition date. The consider- ation transferred includes the fair value of any assets or liabilities result- ing from a contingent consideration arrangement. Transaction costs related to an acquisition are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. For each business combination, the Group measures any non-con- trolling interest in the acquiree either at fair value or at the non-control- ling interest's proportionate share of the acquiree's net assets. The excess of the consideration transferred, the amount of any non- controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets of the subsidiary acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the income statement (see below “Intangible assets” for good- will accounting policy). Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date when control ceases. All intercompany transactions, receivables, liabilities and unrealised profits, as well as intragroup profit distributions, are eliminated. Unre- alised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of sub- sidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. When the Group ceases to have control in subsidiary, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in income statement. Joint operations A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities, relating to the arrangement. Joint control is the con- tractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The Group accounts in relation to its interest for the assets, liabili- ties, revenues and expenses related to a joint operation in accordance with IFRS applicable for the particular item. Transactions with joint operations are recognised in the consolidated financial statements only to the extent of other parties’ interests in the joint operation. Associated companies and joint ventures Associated companies are entities over which the Group has significant influence but no control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Joint ventures are joint arrangements whereby the parties that have joint control of the arrange- ment have rights to the net assets of the joint arrangement. Interests in associated companies and joint ventures are accounted for using the equity method of accounting and are initially recognised at cost. Under this method the Group’s share of the associated company and joint venture profit or loss for the period is recognised in the income statement and its share of movements in other comprehensive income is recognised in other comprehensive income. The Group’s interest in an associated company and joint venture is carried on the balance sheet at an amount that reflects its share of the net assets of the associated com- pany and joint venture together with goodwill on acquisition (net of any accumulated impairment loss), less any impairment in the value of indi- vidual investments. Unrealised gains and losses on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the associated company and joint ven- ture, unless the loss provides evidence of an impairment of the asset

The principal accounting policies applied in the preparation of the consolidated financial statements are set out below: Principal activities UPM-Kymmene Corporation (“the parent company” or “the company”) together with its consolidated subsidiaries (“UPM” or “the Group”) is a global paper and forest products group, mainly engaged in the produc- tion of paper, with an emphasis on the manufacture and sale of printing and writing papers. UPM reports financial information for the following business areas (segments): UPM Biorefining, UPM Energy, UPM Raf- latac, UPM Paper Asia, UPM Paper ENA, UPM Plywood and Other operations. The Group’s activities are centred in European Union coun- tries, North and South America and Asia with production plants in 13 countries. UPM-Kymmene Corporation is a Finnish limited liability company, domiciled in Helsinki in the Republic of Finland. The address of the company’s registered office is Alvar Aallon katu 1, 00100 Helsinki, where a copy of the consolidated financial statements can be obtained. The parent company is listed on NASDAQ OMX Helsinki Ltd. These Group consolidated financial statements were authorised for issue by the Board of Directors on 3 February 2015. According to the Finnish Companies Act, the General Meeting of Shareholders is entitled to decide on the adoption of the company’s financial statements. Basis of preparation These consolidated financial statements of UPM are prepared in accor- dance with International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by the EU) and IFRIC Interpre- tations. The consolidated financial statements have been prepared under the historical cost convention, except for biological assets, available-for-sale investments and certain other financial assets and financial liabilities, defined benefit plan assets and obligations and share-based payment arrangements. The preparation of financial statements requires the use of account- ing estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Accounting estimates are employed in the financial statements to determine reported amounts, including the realisable value of certain assets, the useful lives of tangible and intangible assets, income tax and other items. Although these esti- mates are based on management’s best knowledge of current events and actions, actual results may ultimately differ from them. The preparation of financial statements also requires management to exercise its judge- ment in the process of applying the Group’s accounting policies. The most significant critical judgements are summarised in Note 2. Consolidation principles Subsidiaries The consolidated financial statements of UPM include the financial statements of the parent company, UPM-Kymmene Corporation, and its subsidiaries. Subsidiaries are those entities in which the Group has control. The Group has control over an entity if it has power over the entity; it is exposed or has rights to variable returns from its involvement with the entity and has the ability to use its power to affect the amount of its returns from the entity. Business combinations are accounted for by using the acquisition method of accounting. The consideration transferred in a business com- bination is the fair value of the assets transferred, the liabilities incurred

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UPM Annual Report 2014

UPM Annual Report 2014